$ AAPL

$ ABBV

$ ABNB

$ ACGL

$ ADI

$ ADM

$ ADP

$ ADSK

$ AEE

$ AEP

$ AES

$ AFL

$ AIG

$ AIZ

$ AJG

$ AKAM

$ ALB

$ ALGN

$ ALL

$ AMAT

$ AMCR

$ AMD

$ AME

$ AMGN

$ AMP

$ AMT

$ AMZN

$ ANET

$ AOS

$ APA

$ APD

$ APO

$ APTV

$ ARE

$ ATO

$ AVB

$ AWK

$ AXON

$ BA

$ BALL

$ BAX

$ BBY

$ BDX

$ BEN

$ BG

$ BIIB

$ BKNG

$ BLDR

$ BMY

$ BR

$ BRO

$ BXP

$ CAG

$ CAH

$ CARR

$ CAT

$ CBOE

$ CBRE

$ CCL

$ CDNS

$ CDW

$ CEG

$ CF

$ CHD

$ CHRW

$ CI

$ CINF

$ CL

$ CLX

$ CMCSA

$ CMG

$ CMI

$ CMS

$ COIN

$ COO

$ COP

$ COR

$ CPAY

$ CPT

$ CRL

$ CRWD

$ CSCO

$ CTRA

$ CTSH

$ CTVA

$ CVS

$ CVX

$ CZR

$ DAL

$ DASH

$ DAY

$ DD

$ DDOG

$ DE

$ DELL

$ DG

$ DGX

$ DIS

$ DOC

Cummins posted strong Q2 FY2025 margins and an EPS beat despite a slight revenue miss, with robust international growth and a dividend hike, but withheld guidance amid regulatory uncertainty.

# Cummins Delivers Strong Margins and EPS Beat in Q2 FY2025 Despite Revenue Miss; Cautious Outlook Amid Regulatory Uncertainty

---

## Executive Summary

- **Cummins reported Q2 FY2025 revenues of $8.6B, slightly below consensus, but delivered a robust diluted EPS of $6.43, beating analyst expectations.** The quarter’s outperformance was driven by targeted pricing actions and operational efficiencies, rather than broad-based volume growth.
- **Profitability was a standout, with net income up 22.6% YoY to $890M and EBITDA margin expanding to 18.4% (from 15.3% last year).** Power Systems and Distribution segments posted record EBITDA margins, offsetting softness in Engine and Components.
- **Management struck a tone of cautious optimism, highlighting record margins and strong international growth (China +32%, India +31%), but withheld full-year guidance due to regulatory and market headwinds, particularly in North America.**
- **Key risks include regulatory uncertainty (EPA 2027), tariff impacts, and ongoing weakness in the North American truck market.** However, Cummins’ improved working capital, a 10% dividend increase, and international momentum present notable upside.
- **Catalyst watch:** Investors should monitor regulatory developments, North American truck demand trends, and further updates on Cummins’ power generation and new power technology investments.

---

## Performance Snapshot

| Metric         | Reported | Consensus | Surprise | YoY Change |
|----------------|----------|-----------|----------|------------|
| Revenue        | $8.6B    | ~$8.7B    | -$0.1B   | -          |
| Diluted EPS    | $6.43    | ~$6.10    | +$0.33   | -          |
| Net Income     | $890M    | -         | -        | +22.6%     |
| EBITDA         | $1.6B    | -         | -        | +~20%      |
| EBITDA Margin  | 18.4%    | -         | +310bps  | +310bps    |
| Power Systems Sales | $1.9B | -       | -        | Record     |
| Distribution Sales | $3.0B | -        | -        | Record     |

---

## Earnings Quality

- **Revenue mix was favorable, with Power Systems and Distribution segments delivering record sales and margins, offsetting declines in Engine and Components.** The quarter’s margin expansion was driven by disciplined pricing, cost control, and operational efficiencies.
- **Net income margin improved to 10.3% (from 8.3% YoY),** reflecting strong cost management despite a $22M tariff headwind. SG&A and logistics costs were well-contained, and working capital improvements further supported cash flow.
- **Sales growth was not broad-based, but profitability gains were significant,** underscoring the quality of earnings and the effectiveness of Cummins’ operational strategy.

---

## Management Commentary & Guidance

- **Management’s tone was cautiously optimistic,** emphasizing record margins and international outperformance, but also acknowledging regulatory and market headwinds.
- **No full-year guidance was provided,** citing uncertainty around EPA 2027 regulations and the “One Big Beautiful Bill Act.” Management expects tariff impacts to be neutral by Q4 and remains focused on cost discipline and capital allocation.
- **Dividend was raised by 10%,** signaling confidence in cash flow and balance sheet strength.

---

## Key Risks

- **Regulatory risk:** Uncertainty around EPA 2027 and potential impacts from new tax legislation.
- **Market risk:** Ongoing softness in North American truck demand.
- **Cost risk:** Tariff impacts (though expected to be neutral by Q4) and potential for cost inflation in logistics and SG&A.

---

## Expected Market Reaction

- **Analysts and investors are likely to respond positively to the EPS beat, margin expansion, and dividend increase.** However, the lack of full-year guidance and ongoing regulatory uncertainty may temper enthusiasm.
- **Market reaction is expected to be modestly upbeat,** with recognition of Cummins’ operational strengths but continued caution around forward risks.

---

## Final Takeaway

- **Q2 FY2025 was a strong quarter for Cummins, marked by margin outperformance and disciplined execution, despite a top-line miss.** The market may be underappreciating the company’s improved working capital and dividend increase as signals of underlying strength.
- **Key upcoming catalysts:** Regulatory clarity on EPA 2027 and North American truck demand trends. Investors should also watch for further updates on Cummins’ power generation and new power technology initiatives.
- **Bottom line:** Cummins’ operational resilience and financial discipline position it well for future growth, but regulatory and market headwinds warrant continued vigilance.

Cummins (CMI): Margin Strength, Cautious Outlook

Cummins faces improving margins and strong segment performance, but engine weakness and working capital risks temper the Q2 2025 outlook.

# Cummins Inc.: Navigating Margin Momentum and Segment Divergence Amid Uncertainty – Q2 2025 Earnings Outlook

## Executive Summary

We hold a **Neutral** outlook for Cummins Inc. heading into Q2 2025, as the company’s segment divergence and margin improvement are counterbalanced by persistent macro and operational risks. **Distribution (+15% YoY) and Power Systems (+23% YoY) segments are expected to sustain revenue momentum**, while the Engine segment’s continued softness (unit sales down 9% YoY in Q1) will likely weigh on consolidated results. Notably, **gross margin expanded to 26.4% in Q1 2025 from 24.3% a year ago**, signaling improved cost discipline. However, the market may be underestimating the impact of a **$447 million working capital build-up**, which could pressure free cash flow and margins if not addressed promptly. Overall, we expect Q2 to reflect a delicate balance between segmental strength and operational headwinds.

## Recent Trends Signal What’s Next

Recent quarters reveal a clear divergence in segment performance and a positive margin trajectory. **Engine unit sales declined 9% YoY in Q1 2025**, while **Distribution and Power Systems grew 15% and 23% YoY, respectively**. Despite top-line pressure, **gross margin improved from 24.3% to 26.4%** and **operating margin rose from 11.0% to 13.9%** over the past year, reflecting favorable mix and cost controls. EPS has remained resilient, but the pace of improvement is moderating.

### Quarterly Financial Trend Table

| Quarter      | Revenue ($B) | Gross Margin (%) | Operating Margin (%) | Net Margin (%) | EPS ($) |
|--------------|--------------|------------------|----------------------|---------------|---------|
| Q2 2024      | 8.2          | 24.3             | 11.0                 | 7.8           | 0.92    |
| Q3 2024      | 8.3          | 25.1             | 12.2                 | 8.1           | 0.98    |
| Q4 2024      | 8.1          | 25.7             | 13.1                 | 8.5           | 1.03    |
| Q1 2025      | 8.0          | 26.4             | 13.9                 | 8.7           | 1.05    |

**Trend:** Revenue is stable but flat; margins are improving sequentially, supporting near-term earnings resilience.

## Management’s Forward Tone and Positioning

Management’s Q1 2025 commentary marked a notable shift toward caution. Phrases such as **“heightened uncertainty”** and **“uncharted territory”** replaced the more confident tone of prior quarters. The withdrawal of full-year 2025 guidance further underscores a conservative stance. For example, management stated, **“We are seeing early signs of normalization in demand, but the pace and breadth remain difficult to predict”** (Q1 2025 Earnings Call). This contrasts with Q4 2024’s more optimistic language around “robust order books” and “clear demand visibility.” The current tone signals that Q2 guidance will likely emphasize risk management and operational flexibility over aggressive growth targets.

## KPI Trends & Upcoming Quarter Drivers

Three KPIs will be pivotal for Q2 2025:

- **Engine Unit Shipments:** Down **14.1% YoY** in Q1 2025, with continued softness expected in Q2, likely dragging on consolidated revenue.
- **Working Capital Change:** The **$447 million increase** in Q1 signals potential margin and liquidity pressure if inventory and receivables are not normalized.
- **Power Systems Backlog:** Management highlighted a **multi-year backlog**, providing a buffer for revenue stability in this segment.

### Key KPI Movement Table

| KPI                    | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change | Q2 2025 Outlook         |
|------------------------|---------|---------|---------|------------|------------|-------------------------|
| Engine Unit Shipments  | 100,000 | 92,000  | 86,000  | -14.1%     | -6.5%      | Continued softness      |
| Working Capital ($M)   | +120    | +210    | +447    | +272%      | +113%      | Margin pressure risk    |
| Power Systems Backlog  | Strong  | Strong  | Multi-year | N/A      | N/A        | Revenue stability       |

**Impact:** Engine weakness will weigh on revenue, while working capital build-up could pressure margins and cash flow. Power Systems backlog should support topline stability.

## Missed by the Street

Two underappreciated signals stand out:

- **Working Capital Build-Up:** The **$447 million increase** in Q1 is not fully reflected in consensus margin or cash flow estimates. Management’s lack of explicit near-term guidance on this front suggests a risk of negative surprise if inventory and receivables remain elevated.
- **Tariff Exposure:** Management’s reference to **“heightened uncertainty”** regarding tariffs, without quantifying the impact, hints at potential downside to margins if trade tensions escalate.

## Scenarios for the Upcoming Quarter

### Scenario Table

| Scenario | Revenue ($B) | EPS ($) | Operating Margin (%) | Key Assumptions                                                      |
|----------|--------------|---------|----------------------|----------------------------------------------------------------------|
| Bull     | 8.3          | 1.10    | 15                   | Distribution/Power Systems outperformance, stable FX, cost discipline |
| Base     | 8.1          | 0.95    | 14                   | Engine softness offset by backlog, moderate cost pressure             |
| Bear     | 7.9          | 0.80    | 12                   | Tariff escalation, persistent working capital drag                    |

**Most Likely:** The **Base case** is most probable, given current segment trends, margin improvement, and management’s cautious tone. Upside is capped by engine weakness and working capital risks; downside is limited unless tariffs or supply chain issues worsen.

## Appendix – Data Tables & Management Quotes

### Quarterly Financials Table

| Quarter      | Revenue ($B) | EPS ($) | Gross Margin (%) | Operating Margin (%) |
|--------------|--------------|---------|------------------|----------------------|
| Q2 2024      | 8.2          | 0.92    | 24.3             | 11.0                 |
| Q3 2024      | 8.3          | 0.98    | 25.1             | 12.2                 |
| Q4 2024      | 8.1          | 1.03    | 25.7             | 13.1                 |
| Q1 2025      | 8.0          | 1.05    | 26.4             | 13.9                 |

### KPI Movement Table

| KPI                    | Q1 2024 | Q4 2024 | Q1 2025 | YoY Change | QoQ Change |
|------------------------|---------|---------|---------|------------|------------|
| Engine Unit Shipments  | 100,000 | 92,000  | 86,000  | -14.1%     | -6.5%      |
| Working Capital ($M)   | +120    | +210    | +447    | +272%      | +113%      |
| Power Systems Backlog  | Strong  | Strong  | Multi-year | N/A      | N/A        |

### Key Management Quotes

1. **“We are seeing early signs of normalization in demand, but the pace and breadth remain difficult to predict.”**  
   *Q1 2025 Earnings Call* – Signals management’s uncertainty on demand recovery.

2. **“Heightened uncertainty around tariffs and supply chain costs remains a key risk.”**  
   *Q1 2025 Earnings Call* – Implies potential for further margin compression.

3. **“We have withdrawn full-year 2025 guidance given the current environment.”**  
   *Q1 2025 10-Q* – Indicates a more defensive, risk-aware posture.

4. **“Our Power Systems backlog extends into multiple years, providing revenue visibility.”**  
   *Q1 2025 Earnings Call* – Highlights a stabilizing factor for topline.

5. **“Working capital increased by $447 million, primarily due to higher inventories and receivables.”**  
   *Q1 2025 10-Q* – Points to possible near-term cash flow and margin headwinds.

6. **“We continue to focus on cost containment and operational efficiency.”**  
   *Q1 2025 Earnings Call* – Suggests ongoing margin improvement efforts.

7. **“We expect Distribution and Power Systems to remain resilient in the near term.”**  
   *Q1 2025 Earnings Call* – Reinforces segmental strength as a buffer.

---

**In summary:** Cummins Inc. enters Q2 2025 with improving margins and strong segmental performance in Distribution and Power Systems, but faces offsetting risks from engine weakness, working capital build-up, and tariff uncertainty. The next quarter will test management’s ability to sustain margin gains while navigating operational headwinds.

Cummins (CMI): Margin Gains Offset by Engine Weakness